Feb. 1 (Bloomberg) -- Netflix Inc. will test whether
Machiavelli and math are a winning formula as the world’s
largest subscription-video service debuts “House of Cards,”
its most ambitious step yet into original online-TV programs.

Netflix will make the political thriller, starring Kevin
Spacey, available today to its 33 million streaming subscribers
worldwide. Chief Executive Officer Reed Hastings, looking to
extend the company’s lead in online TV, likens the show to
“West Wing,” the NBC series that ended in 2006, if it were
done by Machiavelli.

“We’re on the cusp of something that will change
television forever,” Hastings said in an interview at
Bloomberg’s New York headquarters. “Our view is that over the
next couple of years as Internet TV really grows, people will
look back and say that this was the turning point.”

Hastings, 52, is placing big financial bets to secure
Netflix’s future as the dominant player as more viewers move
online. He says efforts like “House of Cards” and the revived
“Arrested Development” cement relationships in Hollywood and
help fend off competitors like Amazon.com Inc. Netflix’s Silicon
Valley roots analyzing viewer habits also give it an edge as
cable channels like HBO move online, he said.

“Relative to HBO, we’re much deeper on the tech side, and
relative to Amazon, we’re much deeper on the creative side,”
Hastings said. “We’re able to do more and more calculations and
big-data statistics so that what we do is represent Netflix more
and more as a place where you come for relaxation, escape.”

90 Million

Hastings, whose company has 27.2 million U.S. subscribers,
says Netflix can grow to as many as 90 million over the next two
decades -- a challenge made harder as online competitors like
Amazon, Hulu LLC and Redbox Instant by Verizon pile in, and
traditional channels expand with digital offerings like HBO Go
from the Time Warner Inc.-owned channel.

“If you look at the content gap over the last two years,
it has closed to some degree,” said Michael Olson, an analyst
with Piper Jaffray Cos. in Minneapolis, pointing out that movies
from the Epix channel, which Los Gatos, California-based Netflix
had exclusively online, are now with Seattle-based Amazon as
well. “The game over the next couple of years is going to be
about Amazon and maintaining a content gap.”

To stay ahead, Hastings is sacrificing short-term profit to
spend more on original content. The company said this week it
would borrow $500 million to refinance about $225 million in
debt and spend more on original programming. The company has
committed more than $5 billion to streaming content, including
movies from DreamWorks Animation SKG Inc., Epix and Walt Disney
Co.

Debt Hazard

There are risks. Standard & Poor’s changed its outlook on
Netflix’s speculative BB-minus level debt to negative, citing
cash flow levels this year and next, increasing debt leverage
and “risks associated with original programming.”

The company’s content costs are rising faster than profit,
said Michael Pachter, an analyst at Wedbush Securities in Los
Angeles who has an underperform rating on the shares.

This year, Netflix also will offer a new series by
“Weeds” creator Jenji Kohan called “Orange Is the New
Black,” the thriller “Hemlock Grove” and comedic actor Ricky
Gervais’s “Derek,” slated for summer. “Arrested Development”
brings back the canceled Fox show.

Subscriber Retention

“Lilyhammer,” about a gangster who goes into hiding in
Norway, will return for a second season in the fall after a
“warm-up run” last year that Netflix used to learn about
financing and marketing original content, Hastings said.

The shows may help Netflix keep subscribers, Olson said.

“I don’t know whether it will drive new additions right
out of the gate but it could over the longer term,” he said.

As it did with “Lilyhammer,” Netflix will offer immediate
access to all 13 episodes of “House of Cards.” By contrast,
networks like HBO roll out dramas such as “Game of Thrones”
one episode a week to keep the viewer hooked.

While Hastings expects customers to find more that they
like to keep them on the site, there’s a risk that they may take
advantage of Netflix’s policies, which offer a free first month
and make it easy to quit. A user could sign up, watch all of
“House of Cards” or “Lilyhammer” and then quit.

“We just have amazingly broad content,” Hastings said.

Viewer Feedback

Hastings gains confidence from the number-crunching that
went into choosing new shows. The company financed “House of
Cards” after seeing many subscribers watched Oscar-nominated
director David Fincher’s movies and that others are fans of its
protagonist, Spacey. It resurrected the canceled series
“Arrested Development” after similar analysis.

Netflix paid about $100 million for two seasons of “House
of Cards,” Deadline.com reported. Netflix hasn’t discussed the
cost publicly, said Jonathan Friedland, a spokesman.

The company will measure this and its other originals a
success if a large percentage of subscribers watch entire
seasons, Hastings said. Research also will reveal whether non-members hear about the original programming and are more likely
to subscribe, he said.

“What they’re really doing is going, ‘What are the
genetics of the shows, the types of shows that people want to
use our platform to watch,’” said Richard Greenfield, co-head
of fundamental equity with BTIG LLC in New York.

HBO Threat

Investors including Carl Icahn, who holds a 10 percent
stake of Netflix stock and options, are showing confidence in
the company’s strategy. The shares, which Icahn purchased for
about $58 each in September and October, have almost tripled.
They fell 0.3 percent to $164.80 at the close in New York.

Should its exclusive programming succeed, Netflix might in
the future use its content clout to force Internet carriers to
share a portion of their broadband-access revenue, Greenfield
said. For now, HBO, which had about 39.5 million U.S.
subscribers including its Cinemax channel at the end of 2011,
doesn’t have to break itself off from the cable system.

“If it gets to 40 million or 50 million subscribers you
wonder if HBO starts to reconsider,” Greenfield said.